VwGH: Compensation payments by the employee tax deductible

Jun 16, 2021 Benn-Ibler Rechtsanwälte

In the current case, the Supreme Administrative Court (Verwaltungsgerichtshof, VwGH) ruled on the tax deductibility of settlement payments made by an employee to the former employer.

The background to the decision was the imposition of a fine on a company for collusion in violation of cartel law. The GmbH then accused its former employee of joint responsibility for this violation and demanded compensation for damages from him. As part of a settlement between the company and the employee, a monthly installment payment was agreed upon. In his income tax return, the employee consequently claimed these damage compensation payments as income-related expenses.

In the subsequent income tax ruling, the tax office did not recognize these expenses, as they were subject to the prohibition of deductions. The Federal Fiscal Court (Bundesfinanzgericht) upheld the employee's appeal, stating that compensation payments can be deductible as income-related expenses if they are incurred in connection with an employment relationship.

The tax office appealed against this ruling. The VwGH held that the possibility of deducting compensation payments depends on whether the misconduct can be attributed to the business or private sphere. Whether the compensation payments were caused by the taxpayer's unlawful conduct is irrelevant.

Penalties and fines imposed by the court are subject to the prohibition of deductions. However, if an employee has to pay damages for conduct that leads to a penalty being imposed on the employer, this is not an expense that falls under the deduction prohibition. The existing causal connection between the payment of damages and the cartel fine could also not have the effect that the employee's payments could be equated with the cartel fine and for this reason could be subsumed under the prohibition of deductions. 

In the present case, there was an employment-related inducement connection between the settlement payment and the employee's professional activity. Therefore, the employee's compensation payments were deductible and the tax office's appeal had to be dismissed as unfounded.

VwGH Ra 2019/13/0062 (19.03.2021)